Since emerging out of the
usual summer doldrums, silverís performance has been dazzling. Buyers are
returning to this hyper-speculative metal en masse, driving some
fast-and-furious gains. And the Fed poured rocket fuel on silverís hot rally
last week when it announced its newest inflationary campaign.

The broad commodities rally
the Fed sparked helped catapult silver up a massive 11.4% in just 3 trading
days! This amazing surge capped a total run of 58.3% in the several months
since silverís summer lows. Itís been a lot of fun watching some life return to
this long-neglected metal, and weíve enjoyed some big realized gains in silver
stocks thanks to this silver upleg.

But no rally lasts forever,
the markets flow and ebb regardless of how bullish or bearish their
fundamentals happen to be. Has silver run too far too fast, propelling it into
dangerous overbought territory? Is it topping? Many traders, including me,
have been pondering these critical questions this week. The best near-term
trading strategy for silver varies radically depending on the answers.

If silver has a high chance of
correcting after such a blistering run, traders need to act accordingly. Before
a correction it is essential to realize gains on existing positions, stop adding
any new ones, and maybe even consider shorting or putting silver stocks.
Optimally cash is maximized just before or soon into an emerging correction. On
the other hand, if silver is likely to continue powering higher, the best
strategies are exactly the opposite ones. So is silver topping or not?

Calling tops in real-time is
notoriously hard. No mere mortal knows the future before it happens, and herd
psychology can stretch mature trends well beyond rational endpoints.
Nevertheless, prudent speculators still have to consider probabilities.
Long-term success in the markets depends on only making
high-probability-for-success bets. This maximizes winning trades while
minimizing losses.

While we canít see the future,
the past is crystal-clear. So one way to game silverís probabilities today is
to consider its past major topping events in this secular bull. By looking at
various technical conditions leading into those earlier toppings, and comparing
them to today, we can gain excellent insights into where silver is most likely
to head next. The closer todayís technicals match past major topping eventsí,
the greater the odds we are indeed experiencing a new silver topping today.

This first chart looks at the
vast majority of silverís secular bull to define major toppings. Although this
bull technically began in November 2001 at $4.02, silver really didnít start
rallying in earnest until October 2003 ($4.78). Thatís when this bullís first
major upleg was born. As this chart shows, there havenít been many major silver
toppings, but the uplegs leading into them were very large and profitable.

Most traders new to silver
fail to realize its fabled super-spikes are fairly rare. In 8 years we have
only seen five massive silver uplegs. This sometimes-wild metal has spent the
majority of its bull slumbering in long and boring consolidations. But when a
big-enough gold rally finally awakens silver, traders flood into its tiny market
so fast that its price can skyrocket. Hence this white metalís seductive
sirenís call.

The absolute price of silver
is totally irrelevant from a trading perspective. Today $10 silver seems
end-of-the-world low, I doubt any silver trader on Earth expects to see it
again. But back in 2003 when silver averaged less than $5, that same $10 seemed
impossibly optimistic. Naturally over time, baseline price levels gradually
change. What really matters for trading this metal is how fast it got to
its latest price level.

When silver falls too far too
fast in a correction, it becomes oversold leading to fantastic buying
opportunities. When it rallies too far too fast in an upleg, it becomes
overbought which is a warning to close short-term longs dependent on it. But
how can we measure this? Many years ago I developed a simple and powerful
trading system called Relativity that empirically quantifies how fast any price
has moved relative to its current baseline. You can learn all about it in my
latest Relativity Trading
essay.

In a nutshell, any priceís
200-day moving average forms a perfect baseline. 200dmas arenít static, they
gradually evolve over time to reflect new prevailing price levels. Yet they
still strike a great balance by changing slowly enough to filter out the
endless day-to-day volatility. And in a metal as wild as silver, there is sure
no shortage of chaos to smooth! Relativity expresses silver relative to
its 200dma, calculated simply by dividing silverís daily close by its 200dma and
charting this multiple over time.

The result, rendered above in
light red, forms a well-defined horizontal trading range over silverís entire
secular bull. If you flattened silverís black 200dma line to be horizontal,
then recast silverís price action in perfectly-comparable percentage terms
relative to this flattened line, this is what youíd see. When silver falls too
low relative to its 200dma baseline, it is oversold. When it stretches too
high, it is overbought.

Based on this chart, I use a
Relative Silver (rSilver) level of 0.96x as the oversold buying signal. When
silver slumps to less than 96% of its 200dma, the odds heavily favor a new rally
emerging. These are deeply-oversold major buying opportunities. The last one
occurred in February 2010, when we indeed bought silver stocks near $15 silver
and recommended our subscribers do the same.

Conversely, the top of the
rSilver trading range is 1.40x. When silver stretches more than 40% above its
200dma, it is overbought and such stellar price levels arenít sustainable. You
can see in this chart just how rarely silver has exceeded this key metric.
Before this past week, there have been only three other episodes in silverís
entire secular bull! And all three marked major toppings that signaled the ends
of massive silver uplegs and heralded imminent sharp corrections.

So by its own bull-to-date
standards, silver was wildly overbought this week! On Thursday the 4th
in response to the Fedís immense new debt-monetization campaign, rSilver surged
to 1.396x which was the highest weíve seen by far since March 2008 (a major
top). On Friday the 5th and Monday the 8th, silver stretched even farther to
1.417x and 1.466x its 200dma. And intraday on Tuesday the 9th, before the
raising of margins on silver futures spooked leveraged speculators into selling,
rSilver was even more extreme.

Now realize overboughtness is
a short-term sentiment thing, fundamentals canít short-circuit it. I first
recommended physical-silver investment to our subscribers at $4.20 in November
2001, and have earned fortunes for them trading silver stocks in the years
since. After studying silverís bullish fundamentals for a decade, I understand
them well. Nevertheless, even in the strongest secular bulls prices get
overbought from time to time and need to correct to rebalance sentiment.

And above 1.40x relative,
silver is overbought. As this chart shows, it has simply rallied too far
too fast to be sustainable. At this point Iíd love to wrap up this essay and
tell you the odds overwhelmingly favor an imminent sharp silver correction. But
while Relativity analysis suggests this, other factors have muddied this topping
signal considerably. Chief among them is the technical state of gold
today.

Technically, silver is goldís
little lapdog. Silver only surges when gold is strong enough to get traders
interested in precious metals. Silver always follows, and
usually lags, gold. And
if you do a similar rGold analysis to silverís, the top of its relative range
runs at 1.25x its 200dma. Despite gold hitting $1400 nominal for the first time
in history this week, the most it has stretched over its own 200dma so far in
todayís upleg is merely 1.168x.

So today gold is not
overbought relative to this bullís precedent! And if gold has farther to
run yet, then silver is likely to continue catching a bid as well regardless of
its own technicals. While silver corrections from overbought levels like
todayís are brutally fast and large, its primary-driver gold almost always has
to correct first to act as the catalyst to ignite a silver mass-exodus. Without
a fairly-sharp gold retreat today, silver isnít likely to plummet.

It is definitely odd seeing
silver so overbought this early in a major gold upleg, when the yellow metal
isnít approaching overboughtness. Iím not sure why weíre seeing this anomalous
silver outperformance, but I suspect it has to do with individual investors
finally returning to the markets. Individuals dominate silver, and drive its
wild swings. But thanks to 2008ís crazy stock panic, most individuals have been
hiding on the sidelines in zero-yielding cash for the last couple years. As
these ostrich investors
gradually return, they are driving up volatility in sectors they frequent.

With rSilver arguing for a
sharp correction, but gold opposing one, I wanted to dig deeper into silver
toppings. So I looked at silverís four previous major toppings in this bull,
and compared their various metrics to today. This table quantifies some of the
statistics I considered. The first three silver toppings are separated out as
well, as the fourth was a very atypical post-panic recovery that didnít carry
silver to new bull highs like the earlier toppings.

The average gains in the
primary uplegs leading to silverís first three major toppings ran 92.0% over 7.0
months. Todayís rally is only up 58.3% over 3.4 months, so it still looks small
and immature based on past precedent. But this rally has unfolded a lot
faster. Its average daily gains of 0.81% dwarf the average of the original
three uplegs of 0.62%. Does a smaller and shorter yet much faster upleg
increase overboughtness and hence the risk of an imminent correction?

The next four columns
highlight the gains in the final weeks leading into the major tops on the
previous chart. The first three silver uplegs saw average final-6-week gains of
29.6%, while our current rally saw a similar 6-week run of 29.1% as of its
latest high. The terminal 4-week average gain ran 19.9%, and todayís rally shot
up 19.0% over this span. These comparable numbers also support the view that
silver is indeed topping now.

More ominously, our current
uplegís gains over the last couple weeks before its latest top are much more
extreme than precedent. Silver surged 17.3% in the 2 weeks before this weekís
high, compared to an average of just 14.4% in the terminal stages of its first
three major uplegs. And this rallyís final-week run of 12.4% is absurdly high,
dwarfing the 7.3% average. By these metrics, silver looks much more overbought
now than at terminal stages leading up to past major tops.

Interestingly though, on the
way to those past tops silver spent more days above 1.4x its 200dma. Weíve only
seen 2 days including Mondayís latest silver high, compared to 5, 29, and 4
historically. And that outlying 29-day episode in spring 2006 is particularly
interesting. That was the last time individual investors really got excited
about silver, and they managed to drive it 65% above its 200dma before it
finally gave up its ghost! If individual-investor excitement snowballs today,
this is certainly possible again.

Another interesting angle to
consider is silver seasonality. Not only does silver have very definite
seasonal tendencies
(thanks to goldís), but
its first three (non-panic-influenced) uplegs all topped in spring. To
see a natural silver upleg top in autumn would be quite strange, defying
seasonal tendencies for a strong silver rally between November and April. This
is also another argument in favor of silver not correcting sharply soon.

Obviously todayís silver peak
is very atypical, throwing off mixed signals. It exhibits plenty of technical
warning signs that marked the deaths of past major uplegs, and in some cases
they are considerably more extreme today than at any past upleg top. But on the
other hand, there are opposing factors that suggest silver has room to run yet
despite its serious overboughtness. So why even bother trying to call a top?
Because silverís corrections are so wickedly extreme.

After those original three
major-upleg tops, silver plummeted an average of 30.1% in just 1.4 months! Iíve
heard from many individual investors new to silver and silver stocks today, and
I suspect the majority would have a very tough time psychologically weathering a
typical silver correction. When silver plunges by nearly a third in less than
six weeks, silver stocks get obliterated. 50%+ losses arenít uncommon.
Silverís violent and unforgiving corrections make looking for tops in this wild
metal very important.

So what should we do here
given these mixed signals? With silver inarguably very overbought, I would
definitely not add any new silver-related longs until we see how this peculiar
episode resolves itself. If you have big unrealized gains in silver stocks, you
ought to take some profits off the table or at least throw some stop losses on
your open positions. You can also buy puts to hedge open positions or speculate
on a fast silver retreat. No matter what happens, given todayís extreme silver
technicals great caution is in order!

At Zeal weíve been actively
trading this silver bull for its entire existence. This experience is
priceless, especially when dealing with such a capricious commodity. The 47
silver-stock trades weíve realized in our flagship Zeal Intelligence newsletter
over the past 8 years have averaged annualized realized gains of +50.3%! Part
of this success is due to studying silver itself to better understand the
probabilities governing its behavior. And part is due to our extensive ongoing
research to uncover the elite
silver stocks with the best fundamental prospects to soar.

Though silver is very
overbought today and a sharp correction would be totally justified, enough other
factors conspire against this to leave us at a fascinating crossroads. I donít
know what silver will do next, but as soon as this metal gives me a better idea
Iíll share it with our newsletter subscribers who finance all our research. As
this silver bull marches on, weíll continue to analyze it and look for
high-probability-for-success silver-stock trading opportunities in our acclaimed
monthly and
weekly newsletters.
Subscribe today!

The bottom line is silver is
extremely overbought today, the run to its latest highs was very fast. There
are many similarities between silverís technicals today and what we saw at this
metalís past major toppings. One of silverís typical wickedly-unforgiving
corrections wouldnít be a surprise at all. On the other hand, factors such as
the lack of gold overboughtness and silverís seasonals argue that this silver
upleg could still have room to run yet. Returning individual investors are
getting excited for the first time in years.

Regardless of where silver goes from here, traders need to
realize that it is incredibly risky at these levels. Traders with existing
longs should consider realizing or at least protecting some of their big gains
from this rally. And no new long positions should be added until some of this
overboughtness is worked off. Silver is fun when it surges, but its subsequent
corrections have destroyed many an unwary trader.